Banking Misconduct is the Symptom not the Cause!

In its first few weeks, the Royal Commission into Misconduct in the Financial Services industry has opened the floodgates, and a torrent of misconduct, maladministration, technical incompetence  and downright fraudulent activity has poured out.  And it is not just one bank that has admitted some wrongdoing, but all of the Big Four.  Nor is it one product but, so far, a raft of bad lending, from mortgages to overdrafts and car loans, and more to come.

[Note An edited version of this article appeared in Australian Banking and Finance on 24th March 2018.  Many thanks to editor Elizabeth Fry.]

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Is the Royal Commission solving yesterday’s problems?

The Royal Commission (RC) into Misconduct in the financial industry in Australia, is doing an invaluable service to the Australian public by stripping away the facade that the largest financial institutions in Australia were operating honestly and that they were being well-policed by  world-class regulators.

However, in making recommendations to change the Australian financial regulatory system, the Royal Commission must endeavour to fight the next war, not the last one.

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Royal Commissioner – the Australian regulatory system is broken!

It’s like a Monty Python sketch – “This parrot is NOT dead – see, it’s still paying life insurance! Why would it do that if it was deceased? Who would be silly enough to sell a dead parrot life insurance?”

Justice Hayne, Commissioner of the Royal Commission (RC) into Misconduct in the Financial Industry in Australia, asked a similar question and in the commission’s Interim Report provides some to the point answers:

  • greed – “the pursuit of short-term profit at the expense of basic standards of honesty”; and
  • because they could – “when misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done”.

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Royal Commission shows tone from the top is silent

The Royal Commission must investigate failures of Corporate Governance in the big Australian banks.

Like a grand Verdi opera, the Royal Commission (RC) into Misconduct in the Financial Industry is moving inexorably towards its climactic final act (or, in dry legal terms, Round 7).

The Commission may not end with the traditional ‘fat lady singing’ but likely with a parade of bank CEOs being wheeled in, to be publicly eviscerated by the Commissioner, Justice Haynes, and his ferocious counsel assisting, Rowena Orr QC.

[Note An edited version of this article appeared in Australian Banking and Finance on 16th September 2018.  Many thanks to editor Elizabeth Fry.]

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Let’s Talk About Macro Culture

Let’s start with a question. ‘Does a trader from a Swiss bank on a trading floor in Tokyo have more in common with a trader in the same market in a different bank in London or New York than (say) a teller in a branch in their bank in Switzerland?’

And another question. ‘Does an engineer working for BP have more in common with an engineer from another company working on the same project than (say) an accountant from BP in London?’.

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JPMorgan – Yet another Conflict of Interest Problem

So much for shiny, new Codes of Conduct.

Tidying up before the end of the financial year, JPMorgan Chase and the Securities and Exchange Commission (SEC) and the Futures Trading Commission (CFTC), agreed a fine of $307 million on the company and unusually an admission of wrongdoing [1].
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Barclays – Another Code of Conduct failure!

Another day, another banking scandal!

Just this week, the New York State Department of Financial Services (NYDFS) hit Barclays bank with a huge fine of US$ 150 million, as a result of the bank admitting it had “engaged in certain misconduct regarding the trading of benchmark foreign exchange (“FX”) rates from at least 2008 through 2012 in violation of the New York Banking Law and other laws” [1].

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A festering SORE

On September 11th, twelve ‘Too Big To Fail’ (TBTF) banks reached an in principle settlement in a class action lawsuit to resolve investor claims that the banks conspired to fix prices and limit competition in the market for credit default swaps (CDS).

The historic settlement is estimated to cost some $1.865 billion which, as the claimants’ lawyers said [1], was “one of the largest antitrust class-action settlements” in the financial area.
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